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Ruling

Subject: Rental property expenses

Question

Are you entitled to a deduction for the special levy relating to repairs to the balcony and retaining wall for your rental property?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a unit a number of years ago.

Your unit is one of a unit block and has been available for rent continuously and occupied by tenants for many years, except for changing of tenants.

Strata management was requested to investigate various places around the unit block that included cracking and deformation of a balcony as there were concerns of structural problems that could be a safety issue.

Strata management engaged building consultants who established the following:

· a particular unit balcony needed to be demolished and rebuilt

· load testing was required on other balconies to verify their strength to decide their safety or need to be demolished and rebuilt

· it was established there was movement between brick balustrades and walls throughout the building, checks confirmed overloading of the balconies

· to prevent further cracking or collapse, brick balustrades on all balconies were required to be replaced with a lighter weight balustrade

· spalling concrete repairs be performed on all balconies

· two small sections of a retaining wall was replaced due to cracking

· no further action required for other cracking to retaining wall as it was considered non-structural.

You have provided copies of the following reports that outline the repairs undertaken:

· building consultants inspection report

· building consultants intrusive investigations of the balcony

· scope of work carried out

· building consultants quotes from contractors

· strata management notice and minutes of annual general meeting

· levy notices for repairs

· payment certificate

· completion certificate

Strata management committee agreed to have the repairs carried out and imposed a special levy to fund repairs to the balcony and retaining wall.

The concrete floor to the balcony of a particular unit was demolished and replaced with new concrete, but the reinforcing preserved resulting in a new balcony the same as the original.

There were cracks in the brick balustrades and gaps opening up between the balustrade and the wall of the building on all balconies. The concrete balustrades were replaced with aluminium and glass balustrades to prevent further structural damage.

Sections of the concrete block retaining wall were cracked and required rebuilding. Concrete blocks were used to rebuild the sections of wall that is similar to the old wall.

Work was carried out over several months.

You paid a special levy being your share for your unit.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

The body corporate of your rental property complex has levied a special levy to fund repairs to the balconies and retaining wall. The character of an expense follows the purpose for which the expense was incurred. It follows that if the levy is used to fund expenditure which would be deductible then the contribution made is also deductible.

To determine if the special levy is deductible, we first need to look at what the levy monies will be expended upon and the deductibility of those expenses.

Section 25-10 of the ITAA 1997 states expenditure incurred by you for repairs to any premises, or part of premises, plant, machinery, tools or articles held or used by you solely for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature, for example, an improvement.

Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and indicates that expenditure for repairs to property is of a capital nature where:

· the extent of the work carried out represents a renewal or construction of entirety, or

· the work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or

· the work is an initial repair

In your case, it is necessary to consider the first two points.

Replacement of a subsidiary part or an entirety

According to TR 97/23, property is more likely to be an entirety if:

· the property is separately identifiable as a principal item of capital equipment; or

· the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

· the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

· the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income law.

In the case of W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation ALR 915; 115 CLR 58; (1965) 14 ATD 78; 39 ALJR 246; (1965) 9 AITR 710, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building.

In your case, the unit block is itself considered to be the entirety. The balcony and the retaining wall are considered a subsidiary part of the unit block.

Improvement v repair

TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do.

It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997.

Whether the use of modern material to replace the original qualifies as a repair is a question determined on the facts. If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair.

Balcony and balustrades

In your case, while the use of aluminium and glass balustrades to replace the brick balustrades may result in a minor degree of improvement to the property, we consider the work done to the balcony and the balustrades merely restores the efficiency of the previous function without changing its character. The work will correct damage that had occurred and is also likely to reduce the need for further work being necessary in the future by having the brick balustrades replaced with aluminium and glass balustrades. TR 97/23 states that work done in anticipation of forthcoming defects or deterioration can be considered a repair where it is done in combination with the rectification work.

The work to the balcony and balustrades is considered to be a repair.

Retaining wall

You used the same type of material to rebuild sections of the retaining wall and have not changed its design. The work undertaken has merely restored the efficiency of the previous function and is therefore not an improvement. It is not a renewal or reconstruction of an entirety. The work to the retaining wall is considered a repair.

Therefore, you are entitled under section 25-10 of the ITAA 1997 to a deduction of the special levy relating to repairs to the balcony, balustrades and retaining wall. You can claim the deduction in the income year when you incurred the expense of the special levy.